Joining
principle with profit

Q-News
International, No. 267 (June 1997)

A new Halal investment fund
promises to solve the problem of savings being eroded by inflation without the usual
resort to interest, says Suhail Malik.

The growth of ethical investment notwithstanding,
Shariah-friendly financial services for Muslims in the West have been characterised by one
thing: paucity. Now however, that could be about to change with the introduction of a new
scheme which promises to bring Islamic banking within everybody's reach.

Next month sees the arrival in Britain of the Halal Mutual
Investment Fund, an opportunity designed to meet both the capital and religious
requirements of Muslims living under non-shariah jurisdiction. Requiring a small minimum
investment, the fund is the first to be pitched at Ahmed Bloggs. A wide lacuna exists in
Halal financial services with no investments available at the bottom end of the marker.
The closest rival is OASIS, an equity fund operated by the merchant bank Fleming, which
demands a minimum input of £10,000.

HMIF is based on the rules of a Mudaraba contract, one of the
many types of transaction which satisfy the Shariah stipulation that both lender and
borrower share risks as well as well as rewards.

How the fund works is simple. Investors buy shares at the
designated price of £250. The receipts finance Halal trade transactions, in this case
restricted to the finance of goods, mainly commodities, on behalf of importers and buyers
with any profits to be distributed in the form of dividends every six months. The funds
managers expect gains to compete well against high street interest rates.

"We have estimated that there is up to one billion pounds of
untied capital floating around in the Muslim community, partly because they are
uncomfortable with interest based banking", explained spokesman Abu Bakr Yasin.

"This investment gives Muslims the opportunity to stop their
money from depreciating because of inflation whilst at the same time fulfilling the
religious obligation to avoid interest."

To ensure the widest possible clientele for the new product, HMIF
has obtained the approval of leading British Ulema from across the theological gamut.
These include Dr Syed al-Darsh of the UK Islamic Shariah Council and Mufti Yusuf Satha of
the Deobandi Institute of Islamic Jurisprudence.

Also anxious to avoid the debacle of previous attempts to
establish Islamic banking in Britain, notably the experience of al-Baraka, HMIF has
enlisted the services of a subsidiary of a high street bank to act as an independent
custodian to the fund. All deposits will be held by RBS Securities Services, an arm of the
Royal Bank of Scotland. Fiduciary security will also be provided by Irish law - the fund
is registered in Dublin where it will be overseen by a majority Irish board of directors.
Its operation in UK will fall under the authority of the Securities and Investments Board.
Customers will be able to buy the shares over the counter at RBS branches through the bank
giro credit system. Should they wish to withdraw their money at any time, the fund permits
them to do so at five days notice.

As with most mutual investment funds the emphasis of HMIF is on
capital preservation which necessarily entails low risk investments and hence relatively
lower returns. However, losses cannot be discounted either. "Low risk is not the same
as no risk," said Mushtaq Parker, a financial consultant. "Import and export is
subject to various risks such as currency fluctuations and politics. There are no cast
iron guarantees but then again Islamic law does not allow risk free investments."

HMIF, one of whose main shareholders is the Saudi Arabian
al-Ghosaibi Group, is the latest addition to a growing range of financial services geared
towards the Muslim community.

Earlier this year the United Bank of Kuwait announced the launch
of its Halal mortgage scheme to rival conventional building society schemes. Fleming's
OASIS international equity fund which opened last year, has been a success story with £24
million taken in the first year. The fund netted a return of 8.4 per cent against a growth
rate of 9.8 per cent for the world index 0f 2600 stocks. The emergence of the Islamic
sector also corresponds to a parallel growth in ethical investments. Many managers now
offer ethical portfolios which exclude investment in armaments and exploitative trade.